Credit Cycle Perspective

I have had a number of recent conversations with bankers regarding quarter-end asset valuations related to “Other Than Temporarily Impaired” asset concerns. Auditors are once again leaning on banks to aggressively recognize impairment charges on a host of financial assets held in portfolio.

I want to put into perspective the credit markets as related to asset valuations and historical cycles. My theory is that financial assets in the portfolio are not impaired permanently, only temporarily. I offer a 20-year history of swap spreads as evidence. Swap spreads are used as a proxy for all credit spreads, particularly for financial companies, as most bank funding rates, including FHLB advances, are based on swap spreads. The chart below this article (source: Bloomberg) shows the history of swap spreads since November 1988, a period covering almost 20 years. During this time there have been three distinct periods of distress in credit markets, including the …